NEW DELHI: For global brokerage firm UBS, India is an unattractive market because of its extremely expensive valuation when compared to ASEAN countries.
The BSE Sensex has rallied 27% year to date, propelled by foreign flows but the real question for the country is how quickly can mobility restrictions ease and how long will retail flows persist now that global funds are turning net sellers in India.
According to UBS, India's valuations are rising with fading earnings momentum and at a time when there is less scope for economic rebound this year. The brokerage has an ‘underweight’ stance on India. UBS said retail investors in India and Taiwan have played an outsized role.
“The relative valuation of India to ASEAN, two areas with similar growth dynamics and occasional perceived macro vulnerabilities, looks too wide to justify. We note that both in India and Taiwan, retail investors have played an outside role, which while difficult to predict in terms of reversing, creates an additional potential headwind if this demand unwinds,” the foreign brokerage said in its Asia Pacific Equity Strategy note.
It also said low real yield and expensive currency is making India vulnerable to tapering by the US Federal Reserve.
Indian stocks have crossed record levels as domestic and foreign investors poured money into stocks. With a 31% rise year to date, Nifty 50 has so far been the best performer in Asia. Point to note: The rise in Nifty 50 comes despite MSCI APAC (not including Japan) remaining flat. Even the MSCI India Index, which is up more than 17% in the last three months, hit a record high on October 18 but during the same period the MSCI Emerging Market Index was down 1.3%.
So what does this mean?
The note implies that other Asian markets like Indonesia, Philippines, Singapore, Malaysia and China, which have underperformed when compared to India, could attract more foreign flows going ahead. Also this: There is less scope for a rebound in India, which has already outperformed others.
In the ongoing September quarter, foreign institutional investors have so already pulled out $1.1 billion on a net basis as against inflows of $0.8 billion and $7.3 billion in the preceding two quarters. The winding down of US Fed's policy may curb global inflows further.
The brokerage has, on the other hand, double upgraded China to overweight rating while India, Taiwan and Australia as the least favoured.
"We moved underweight China in summer last year. The economy was the first to recover from Covid lockdowns, earnings had rebounded and been helped in relative terms by relatively favourable offline to online trends which we thought would dissipate in 2021, valuations had become relatively very expensive, and we expected very easy monetary policy to be removed," said the note.
